Perhaps the Greek government's biggest misjudgment since it was
elected in January has been to assume that the solution to its debt
crisis lies in Berlin, or Brussels, or Frankfurt. It has spent much
of its first three months trying to browbeat European governments
and the European Central Bank into handing it condition-free money.
Last week, the action shifted to where Athens's attention should
always have been focused: Washington, D.C. The key to any Greek
debt deal lies with the International Monetary Fund.
The IMF was brought into the eurozone bailout programs from the
very start in 2010 because its expertise, rigor and independence
were seen as crucial to persuade skeptical European parliaments to
stump up taxpayer cash for crisis-stricken countries. That decision
was controversial--many believed Europe should have been able to
deal with its own problems. But once the IMF came into the process,
it became politically indispensable: no IMF, no deal.
Berlin has been hiding behind the IMF throughout the current
crisis. Ask German officials to defend previous Greek bailout
programs and they will reply that it wasn't they who designed them
but the IMF; ask what conditions Athens needs to meet to receive
bailout funds and they will reply that is a matter for Greece and
the IMF. The message from Berlin is that only the IMF has the
technical skills to analyze the fiscal impact of Greece's reform
plans; a deal that is good enough for the IMF is good enough for
Berlin.
This has put the IMF in an invidious position. The IMF is
trusted because it has rules and procedures designed to shield it
from the kind of political interference that has undermined
confidence in European institutions, the European Commission in
particular.
The IMF draws its funding from 188 members, among them many of
the world's poorest countries, and is only supposed to lend where
it is confident that the debt burden is likely to be sustainable
and that the borrower is likely to have access to market funding
when the program ends. These safeguards explain why the IMF is seen
as the world's safest lender.
But the IMF also prides itself on being a source of global
financial stability and certainly not a source of instability. That
can make life complicated when dealing with a member of a currency
union such as Greece.
In 2010, the IMF agreed to the first Greek bailout program
despite deep misgivings on its board and among its executives that
the debt wasn't sustainable because it feared that any
restructuring of Greek debt could destabilize the whole eurozone.
Critics argue that the extra debt and austerity demanded of Greece
instead were a major reason for the scale of the economic
collapse.
Now the IMF finds itself in a similar bind. It has loaned money
to Greece on the basis of a detailed memorandum of understanding, a
legally binding contract that sets out the reforms Athens must
undertake to receive IMF cash.
For almost a year, the IMF has been refusing to pay the next
bailout installment to Greece until it completes the reforms
required under that deal. It stuck to its guns even as the previous
Greek government fell and the new one has come close to
bankruptcy.
Those reforms were reiterated in a letter in February from IMF
Managing Director Christine Lagarde to Eurogroup President Jeroen
Dijsselbloem: They included reform of the Greek pension system,
labor market, product and services markets, the tax system and
public administration.
But the IMF appears to have blinked. Although its agreement with
Greece is separate to that of the eurozone's, the IMF has had to
recognize that for practical purposes they are the same: The
eurozone has boxed itself in and won't distribute its funds even to
alleviate an acute liquidity squeeze until Greece has reached a
deal with the IMF. The IMF's intransigence risked pushing Greece
toward a messy default and possible euro exit that no one wanted.
So the IMF last week agreed to streamline its demands.
This is a significant move. Greece must still agree on and
implement difficult reforms, most likely including some overhauls
of pensions and value-added tax. And some officials fear that even
a streamlined deal may prove too much for Athens to deliver before
a mid-May deadline when parliamentary approvals must begin if cash
is to be disbursed before the program expires at the end of June.
But the IMF has lowered the bar to a Greek deal.
Even so, it will still need to satisfy its shareholders that
Greek debt is sustainable before it can deliver its cash. That
could be tricky: The combination of a reduced reform program and
the impact of months of political turmoil on Greece's growth
prospects will have opened a large funding gap. Greece's debt
burden will need substantial restructuring, something eurozone
governments have ruled out beyond changes to interest rates and
maturities on existing loans.
Much may then hinge on how rigorously the IMF decides to enforce
its own debt-sustainability rules. Will it demand that the eurozone
play its part in resolving the crisis, with the risk that it
refuses, leaving Greece unable to pay its debts? Or will it bow to
eurozone political reality and fudge its analysis again, as it did
in 2010, thereby ensuring Greece's drama drags on? All eyes should
be on Washington.